Computation of Profit


Anthony v. Canada (National Revenue), 2016 FC 955

matching principle not a rule of law

Approximately eight years after the taxation year in question, the taxpayer made a s. 152(4.2) application to CRA to allow the personal deduction by him of rental expenses that had been incurred under leases of equipment (used in his machinist business) that had been entered into in the name of his corporation (which was inactive except for entering into those leases). Boswell J rejected a submission (at para. 23) that “it was unfair for the Minister’s delegate not to ‘match’ the expenses he incurred in paying the rental payments for the two machines against the income he earned by using the machines, and…although his corporation’s name was on the lease with CIT, the corporation was in fact inactive,” and stated (at paras. 24, 25):

[T]he matching principle is not a rule of law which dictates or requires that expenses must always be matched with profits; it is simply an accounting principle that a court may or may not consider depending upon the particular facts and circumstances of a case. …

…The Applicant chose to collect revenue generated by the machines personally, rather than through his corporation, and he cannot rely upon an accounting principle to ignore the legal reality of the lease and argue that the cost of the lease payments should be attributed to him personally and deductible from his personal income for the 2001 taxation year. …

Locations of other summaries Wordcount
Tax Topics - General Concepts - Separate Existence taxpayer bound by lease agreements being contracted by his corporation rather than personally 454
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) s. 152(4.2) denials are subject to judicial review 123

Bernick v. Canada, 2004 DTC 6409, 2004 FCA 191

A Bahamian partnership of which the taxpayer was a member purchased bonds at less than 10% of their maturity value, recorded the bonds in its financial statements as having a cost equal to the maturity value, and recorded a resulting loss when the bonds were sold within the following two years for values ranging from 10% to 14% of maturity value.

In finding that the Minister had correctly disallowed the deduction by the taxpayer of his share of the supposed losses on these bonds, Sharlow J.A. indicated that the accounting method followed by the partnership violated the principle established in the Canderel case, 98 DTC 6100 "that an accounting method is not acceptable for income tax purposes unless it results in an accurate determination of income" (p. 6412).

Sharlow J.A. went on to indicate (at p. 6412) that "in this context, 'accuracy' means reasonable accuracy, bearing in mind that any computation of profit may involve estimates and judgment calls relating to timing, allocation, estimates of value, and other such matters that accountants are often called upon to make".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence foreign law presumed the same 60
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base cost of bonds equal to their FMV 137
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 173

Bellingham v. The Queen, 96 DTC 6075 (FCA)

An award of "additional interest" received by taxpayer pursuant to s. 66(4) of the Expropriation Act (Alberta) (a provision which required repayment of such amount in circumstances where an expropriating authority offered less than 80% of the amount ultimately awarded and the Expropriation Board was of the opinion that such lower figure was due to the fault of the expropriating authority) did not, by its nature, constitute compensation for the lands that had been taken.

Kaneff Properties Ltd. v. The Queen, 95 DTC 5345 (FCTD)

gain from when commenced developing as commercial office tower was capital gain

At the time the taxpayer (a real estate developer) acquired land in 1970, it had an alternative intention of possibly reselling the land at a gain. However, in 1976, it made a clear decision to develop the land together with the adjoining parcel for use as two commercial office towers (a revenue-producing investment), at which time it leased the adjoining property to a related company and undertook plans for the constuction of both parcels as the two office towers.

Rothstein J. found that the relevant intention for purposes of determining whether the portion of the appreciation that occurred between 1976 and 1983 should be treated as a capital gain or income was the taxpayer's intention at the time of commencement of development in 1976, rather than its intention at the time of acquisition in 1970, with the result that that portion of the gain realized on resale of the land in 1983 was on capital account (with only the balance of the gain being on income account).

Whittles v. Uniholdings Ltd. (No. 3), [1995] BTC 119 (Ch. D.)

In order to lower the effective interest rate payable by it on a loan of £14,056,000, the taxpayer and its bank agreed that at the time the bank paid £14,056,000, to the account of the taxpayer, the bank would debit a U.S.-dollar loan facility with the equivalent sum in U.S. dollars and that the bank would purchase for the taxpayer's account for forward delivery enough U.S. dollars to enable the taxpayer to repay the outstanding principal on the U.S.-dollar loan facility on its maturity date.

Although the U.S. dollars delivered under the contract appreciated significantly, Sir John Vinelott found (at p. 137) that:

"... the agreement between the company and the bank was a single composite agreement under which the company could not deal with the forward contract without the consent of the bank and under which the bank was to be at liberty to use the dollars purchased in discharge of the dollar loan, to the extent that that had not been repaid before 15 March 1983. If that is right, it must follow that the company did not make any profit on the forward purchase of dollars and made no sterling loss on the repayment of the dollar loan, ..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income 202

Pollock v. The Queen, 94 DTC 6050 (FCA)

Hugessen J.A. indicated that it had not been shown that the Minister was wrong in computing the taxpayer's gain on income account from the disposition of shares previously acquired by him on the exercise of employee stock options by including the deemed remuneration under s. 7 in the cost to the taxpayer of those shares. In any event, if the Minister was wrong, the taxpayer could hardly be heard to complain because he had not been subjected to double taxation.

The Queen v. Cyprus Anvil Mining Corp., 90 DTC 6063 (FCA)

Urie J.A. found that the taxpayer effectively was precluded from computing its income for purposes of the former 36-month new mine holiday (by valuing closing inventory at market) on a different basis than its computation of income for its accounting and taxation years which overlapped, preceded and followed the 36-month exempt period (by valuing inventory at the lower of cost and market). "The critical principle, however, is that there be consistency in the computation of profit as that term is understood in subsection 9(1) of the Act."

Magilb Development Corp. Ltd. v. The Queen, 87 DTC 5012, [1987] 1 CTC 66 (FCTD)

preliminary overtures for approval of housing development of farm did not convert to inventory

A director and controlling shareholder of the taxpayer made "[t]entative overtures" (p. 5014) to the City of Red Deer in 1971 respecting the development of its potato-growing homestead property as a housing subdivision, but "no final subdivision plans were prepared or filed.” The municipality was approached again two years later, at which time municipal officials advised that the land was beyond the reach of existing water and sewage facilities. This issue was resolved in 1975, and, the corporation sought approval to subdivide the property in 1976, which was approved. It apparently sold the property to a developer later in 1976.

After noting (at p. 5016) that the issue was whether there was a “clear and unequivocal positive act” to implement a change of intention so as to “indicate a change in the character of the homestead property from a capital asset to a trading asset,” McNair J. held that a change in use from capital property to inventory did not occur until 1976, which was the year in which "the family held the first official meeting of shareholders to discuss what should be done with the … property" (p. 5014). The Minister was directed to reassess the 1976 year on the basis that the homestead property did not change into inventory until January 1, 1976.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 35
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate tentative overtures for subdivision did not effect a change in use 103

Hughes v. The Queen, 84 DTC 6110, [1984] CTC 101 (FCTD)

conversion to inventory when application for strata conversion made

The taxpayer purchased an 18-suite apartment building in Vancouver in January 1973, mostly with the proceeds of mortgage financing at high rates of interest. She was not successful in 1973 in maintaining continued steady employment, and had also heard that the City was considering a moratorium on strata title conversions, and in July 1973, she wrote to the City applying for permission to convert the building into strata title apartments. Collier J stated (at pp. 6112-6113) that although “the plaintiff’s only motivating intention in January 1973 was the acquisition of an investment,” he was “satisfied the plaintiff intended to pursue the strata title scheme from the time she made application to the city” and that “at that stage … the plaintiff intended to convert to inventory.” The taxpayer received official approval in January 1974 and went on to sell strata units in her 1974 taxation year at a gain.

Collier J then went on to state (at p. 6113) that “I do not know the exact consequences those findings will have on the Minister’s assessment.”

Lloyd Estate v. MNR, 63 DTC 1349 (Ex Ct), briefly aff'd 65 DTC 5031 (SCC)

The taxpayer acquired a mortgage at a discount, and later foreclosed on the mortgage and sold the foreclosed property for a purchase price which was secured by a mortgage in favour of the taxpayer in the same principal amount as the previously-foreclosed mortgage. After finding that the taxpayer realized income in the year of foreclosure and sale in the amount of the original discount, Noël J. stated (p. 1358):

"It might have been possible to establish that the real value of the security recovered did not cover all of the amount of the discount and with proper evidence this might have been done. However, the evidence before me does not enable me to establish whether such is the case or not and the fact that the appellant agreed to accept a new mortgage from the purchaser for apparently the amount outstanding, presumably comprising the full amount of the discount, ... would indicate, I believe, that the value of the security recovered was sufficient to cover the full amount of the discount ..."

Silverman v. MNR, 60 DTC 1212, [1960] CTC 262 (Ex Ct)

The assumption by the purchasers of an inventory property of a mortgage (including a mortgage bonus) constituted part of the proceeds of disposition received by the partners of the vendor partnership. "[T]his undertaking was something of value to the partners since, without it, they would have been obliged sooner or later to find the money to discharge their obligation and the purchasers' undertaking relieved them of the obligation to do so."

Tuxedo Holding Co. Ltd. v. MNR, 59 DTC 1102, [1959] CTC 172 (Ex Ct)

The original shareholders of the taxpayer had transferred raw land (which they had valued at $355,000, based on an estimated selling price for building lots minus a 45% discount for estimated expenses) to the taxpayer in consideration for the issue of shares having a par value of $200,000. The difference of $155,000 was credited to contributed surplus. Cameron J. held (p. 1108) that:

"The consideration paid by the appellant for the ... lots was the par value of the shares issued and nothing more. What it gave up was the right to call upon the allottees of the shares for payment of the par value of each share."

The cost of the lots was not affected by the contemporaneous transfer of additional land to the taxpayer in consideration for shares, with a view to donating such land to the University of Manitoba in order to enhance the value of the land retained by the taxpayer.

Royal Trust Co. v. MNR, 57 DTC 1055, [1957] CTC 32 (Ex. Ct.)

Admission fees and annual membership dues of various officers of the taxpayer at social clubs which were paid by the taxpayer in order to help those officers bring in business, were deductible by it. The evidence established "that it was considered good business practice for a trust company to have its business getting officers become members of social clubs and pay their admission fees and annual membership dues" (p. 1061). Thorson P. followed his finding in the Imperial Oil case "that the deductibility of disbursements or expenses was to be determined according to the ordinary principles of commercial trading or well-accepted principles of business and accounting practice unless their deduction was prohibited by reason of their coming within the express terms of the excluding provision of section 6(a) [the antecedent of s. 18(1)(a)]", (p. 1059) although he went on to observe that he "should have omitted the reference to accounting practice". (p. 1059)

See Also

GMAC Leaseco Corporation v. The Queen, 2015 DTC 1141 [at 908], 2015 TCC 146

surcharges received by lessor at lease termination for excess use were income

Leases by the taxpayer ("GMAC") to GM dealership customers leases stipulated a "residual value" at which the customer could purchase the vehicle at lease termination. If the car usage exceeded a stipulated maximum, a customer who returned rather than bought the vehicle on lease termination was charged an "excess kilometre charge," typically of $0.10 per kilometer. Customers at the inception of the lease could also increase the maximum kilometers the residual value by "purchasing" additional kilometers at 8 cents per kilometer. This reduced the residual value by the product of $0.08 and the number of "purchased" kilometers, thereby increasing their monthly rental payments.

GMAC treated the excess kilometre charges as proceeds of disposition reducing the undepreciated capital cost of its pool of Class 10 properties. In finding that they instead were received on income account, Graham J stated (at para. 18):

Whether the customer paid $0.08/km up front by purchasing additional kilometres or at the end of the lease by paying an Excess Kilometre Charge, the effect was the same. The customer was paying for an anticipated decrease in the market value of the vehicle at the end of the lease. If the customer paid for that amount up front by purchasing additional kilometres, GMAC considered it to be on income account. How then could it be on anything other than income account when the customer paid the same amount at the end of the lease?

See summaries under s. 9 – timing, s. 12(1)(x), and s. 9 – compensation payments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) amount subject to potential repayment obligation was not received 240
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.4) amounts replaced reduced lease income rather than contributing to leased vehicles' cost 217
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing capital tax accrued from day to day 206
Tax Topics - Income Tax Act - Section 9 - Compensation Payments payments received in consideration for reducing lease payments were compensation for lost lease income, and s. 9 income 248
Tax Topics - Income Tax Act - Section 9 - Timing inducement payments received by lessor from manufacturer not income until potential repayment obligation quantified 199

Chronis v. The Queen, 2010 DTC 1188 [at 3441], 2010 TCC 218

Losses sustained by the taxpayer, when most of the property used by him in a business of selling pirated satellite television signals was seized by the RCMP, were fully deductible. Most of the property was inventory, and the balance of the property gave rise to a terminal loss.

Beaudry v. The Queen, 2010 DTC 1266 [at 3853], 2008 TCC 17, aff'd Romar v. The Queen, 2010 DTC 5076 [at 6816], 2009 FCA 48

The taxpayers set up an avoidance scheme wherein they bought partnership units with promissory notes to pay 7-10 years later an amount in Brazilian cruzeiros. The partnership contracted with a Brazilian research firm. The partnership paid in cruzeiros - approximately 20% of the amount owing was paid in cash, and 80% was an assignment of the promissory notes. The cruzeiro was experiencing rapid inflation, so the notes were nearly worthless - in effect, only 20% of the payment to the research firm was genuine.

In computing the partnership income, the amount of the promissory notes, measured using the current exchange rate, was deducted. Because the notes had no significant value at the time if they were used to pay the Brazilian firm, Anger J. disallowed their deduction.

(Angers J. subsequently disallowed the deductions entirely, under s. 67.)

Saskferco Products Inc. v. The Queen, 2007 DTC 1183, 2007 TCC 462, aff'd 2008 FCA 297

Sales revenue that the taxpayer earned in the United States were required to be translated into Canadian dollars at the current rate of exchange when earned notwithstanding that in the taxpayer's financial statements, the sales revenue was translated at the rate of exchange that prevailed when the taxpayer borrowed in U.S. dollars to finance the construction of the nitrogen fertilizer plant that produced the product in question (with such financial statement treatment being based on the sales providing an effective hedge against fluctuations in the exchange rate). Woods J. stated (at para. 46) that:

"In computing revenue or expenses denominated in a foreign currency, a taxpayer must use the foreign exchange rate in effect at the time of the transaction."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange loan repayments on capital account 152

Hollinger Inc. v. The Queen, 98 DTC 1913 (TCC), aff'd 99 DTC 5500 (FCA)

no converson to inventory when shares with accrued loss acquired with resale intention

In finding that shares with a high adjusted cost base but nominal fair market value that the taxpayer had acquired with a view to realizing the accrued capital loss were capital property to the taxpayer, Bowman TCJ. stated (at p. 1918):

"I do not regard a decision to sell an unproductive investment on terms that are as favourable as possible as a change of use, giving rise to deemed disposition and a conversion from capital to inventory."

Bondar v. The Queen, 97 DTC 517 (TCC)

cost of shares acquired in consideration for largely worthless loan obligation was nil

In connection with the acquisition of the shares of a corporation ("LTM") by another corporation ("HSS") of which the taxpayer was the general manager, the taxpayer used the proceeds of a daylight loan to advance money to LTM, LTM loaned the same sum to its shareholders, the shareholders loaned the same sum to the taxpayer on a non-interest bearing basis with the principal not being due for approximately 100 years, and the taxpayer used the sum to pay off the daylight loan. Beaubier TCJ. found that there was no evidence to rebut the assumption made by the Minister that the cost to the taxpayer of the loan made by him to LTM was nil. Accordingly, the repayment of such loan by way of set-off against amounts subsequently becoming owing by the taxpayer to the successor of LTM gave rise to taxable proceeds to the taxpayer.

Federal Commissioner of Taxation v. Energy Resources of Australia Ltd., 94 ATC 4923, [1994] FCA 924 (Full Fed. Ct.)

Hill J. stated, in obiter dicta (at p. 4950-4951):

"In my view, where a discounting transaction is conducted wholly in a foreign currency, the proper way of determining the amount of deduction to which a taxpayer is entitled by virtue of the discounting, will be to take the discount in the foreign currency and then translate the result into Australian dollars for the purpose of then computing the taxable income."

He further noted that the alternative method (of translating both the amount received and the amount repaid into Australian dollars at the then prevailing spot rate) was impractical (p. 4953):

"[I]t is obvious that it would normally be impractical to effect instantaneous translations into Australian dollars of every debit and credit arising in the course of business transactions."

Roos v. The Queen, 94 DTC 1094 (TCC)

conversion to inventory when fully committed

Land which the taxpayers acquired as capital property for use as a tree nursery was converted into inventory when they made formal applications to the Ministry of Municipal Affairs and Housing for a plan of subdivision for a particular block of lots. "By this time they are fully committed to proceeding with the subdivision and had progressed far enough that their change of intention was evident from their affirmative acts." (p. 1099)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) conversion when application for plan of subdivision 252

Marina Québec Inc. v. MNR, 92 DTC 1392 (TCC)

Tremblay J. applied the decision in Osborne v. Steel Barrel Co. Ltd. (1942), 24 TC 392 in finding that inventory which the taxpayer acquired in consideration for issuing redeemable preferred shares with a par value of $603,081 had a cost at least equal to that amount.

Street v. MNR, 91 DTC 369 (TCC)

income inclusion added to cost on general principles

The cost to the taxpayer of shares which he disposed of on income account following the exercise of employee stock options included the amount of the s. 7 benefit which had been included in his income, notwithstanding the inapplicability of s. 53(1)(j).

Jones v. MNR, 90 DTC 1849 (TCC)

no conversion when draft plan of subdivision submitted: at time of rezoning at the earliest

The taxpayer, a building contractor, acquired 4,990 acres of raw unserviced land for his personal use in 1967. The taxpayer’s neighbour, with the taxpayer’s acquiescence, submitted an application for approval of a draft plan of subdivision approval to the Ontario Ministry of Treasury, Economics and Inter-Governmental Affairs on August 24, 1973 respecting 11 acres of land including a 1 acre portion of the taxpayer’s lands, and this application was approved on December 19, 1973. On May 14, 1974, the City of Thunder Bay rezoned the land to permit residential construction. On May 28, 1975, the taxpayer and the neighbour entered into an agreement with an engineering firm to commence development work.

Prior to the rezoning, the taxpayer granted Canadian Tire Corporation an option to purchase the land which, however, it did not exercise as it was unsuccessful in having the land rezoned to commercial use.

In rejecting a submission that a change in use did not occur until the registration of a final subdivision plan in June 28, 1977, Taylor T.C.J. stated (at p. 1852):

I do not agree with that view and Mr. Jones was informed during the trial, that actions and conduct by a taxpayer long in advance of actual registration of a subdivision plan may well be sufficient to establish a date or time at which a commitment to a change in use can be determined for a property. [emphasis in original]

Taylor T.C.J. considered himself to be bound to choose only as between the two change-of-use dates advanced by the two parties, being January 1, 1973 and May 28, 1975, and indicated (at p. 1853) that the latter date was “a more acceptable date.”

However, he nonetheless indicated (also at p. 1853) that the date “which does commend itself to me” was the date of rezoning, stating that “it is difficult to imagine that the rezoning of the subject property itself for ‘single family dwellings’ could have been consummated without the express knowledge, consent and cooperation of Mr. Jones… .”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) conversion when retained engineers 152

Mackinnon v MNR, 88 DTC 1651 (TCC)

filing of premature subdivision plan did not effect a change in use

The taxpayer filed a proposed plan of subdivision respecting a four-acre piece of land near Charlottetown with the Planning Division of the Department of Community Services, P.E.I. in 1971. It advised that he should await the outcome of a municipal development study before moving forward, and suggested that he have a professionally-prepared plan prepared. In 1980, he sold the land to Northumberland ferries, i.e., for commercial use by it.

Tremblay T.C.J. held, following Magilb, that the property did not change in use from capital property to inventory in 1971, and it was sold in 1980 on capital account.

Cantor v. MNR, 85 DTC 79 (TCC)

improving rental property for sale through condominium registration and repairs did not convert to inventory

Twenty eight townhouses which the taxpayers purchased as rental properties in 1969 were not converted into inventory when a number of years later they decided to sell the properties separately to individual purchasers for their own use and, to accomplish this end, expended significant amounts on repairs and obtained separate title for each townhouse under condominium legislation.

In finding that all the proceeds of disposition received by the taxpayers were on capital account, Cardin J. stated (at p. 84):

"In the case of bar, there was no change in the character or indeed in the use made of the townhouses. Whether they were rented or owned by the occupier, their use was residential.

... It appears evident to me from the evidence that the appellants' whole course of conduct as of late 1974 was to dispose, at the best possible price, of rental income property which was no longer a profitable investment."

Gold Coast Selection Trust, Ltd. v. Humphrey (1948), 30 TC 235 (HL)

The taxpayer transferred mining concessions to a newly-incorporated company in consideration for shares of the company contemporaneously with an initial public offering of shares of the company.

The decision of the Commissioners that the shares acquired by the taxpayer on the transfer should be valued at the end of the accounting year in order to determine the profit on the transfer, was upheld. The value of the shares received was to be determined on the basis of the amount of money for which the shares could have been sold, which was not necessarily the same as the par value of the shares received.

Osborne v. Steel Barrel Co., Ltd. (1942), 24 TC 293 (C.A.)

A corporation purchased various assets including inventory in consideration for the payment of £10,500 and the issue of 29,997 fully-paid shares with a par value of £1 each. In rejecting the Crown's submission that because the issue of the shares did not cost the corporation anything, the inventory acquired by it had a correspondingly low cost, Lord Greene M.R. stated (pp. 306-307):

"A company, therefore, when in pursuance of such a transaction it agrees to credit the shares as fully paid, is giving up what it would otherwise have had, namely, the right to call on the allottee for payment of the par value in cash ... Accordingly, when fully paid shares are properly issued for a consideration other than cash, the consideration moving from another company must be at the least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired." [C.R: 54(a)]

Administrative Policy

17 January 2020 External T.I. 2017-0685341E5 - Tax Comparison of the FIT & Net Metering Programs

a credit generated by a business under the Ontario Net Metering Program is only income when applied, and is offset by a deduction for the electricity consumed

Under the Net Metering Program administered by the Ontario Power Authority, a participant who generates electricity primarily for its own use from a renewable energy source is billed only for the difference between the value of the electricity consumed by the participant and the value of the electricity supplied to the provincial electrical distribution system, so that where the value of the participant’s electricity consumption is less than the value of the excess electricity supplied, the participant will accumulate a credit, which is available for use against the participant’s future electricity consumption in the next billing period – and if the accumulated credit cannot be used in its entirety within a given 12-month period, it will be forfeited as of the next billing period.

CRA stated:

[W]here a participant in the Net Metering Program generates electricity that is consumed in the course of carrying on a business or earning income from another property (such as a rental building), the value of such a credit would be included in the participant’s income from such business or property. This income inclusion will be realized in the taxation year in which the credit is applied against the participant’s electricity consumption costs and it will be equal to the value of the credit applied. However at that time, the participant would typically be entitled to an offsetting deduction for the cost of the electricity consumed by the participant, being an expenditure incurred for the purpose of earning income from the business or property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit credits received under the Ontario Net Metering Program respecting electricity generated for personal consumption are not income 210
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 43.1 general Class 43.1 or 43.2 treatment of specified energy property rules to equipment used in the Ontario Feed-in Tariff program 157
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(25) application of exception to the specified energy property rules to equipment used in the Ontario Feed-in Tariff program 364

22 January 2020 External T.I. 2014-0559281E5 F - T5008

cost of short sale is FMV of borrowed shares

CRA indicated that in a short sale, the cost of the shares sold short is the fair market value of the shares at the time they are borrowed for the purpose of being sold short – so that the cost of the sales sold short is not the cost of the shares subsequently purchased to cover the short.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1) writing of call option (with deemed nil ACB) is reported as having nil “cost” on T5008 99
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) option writer can deduct its expenses from deemed s. 49(1) proceeds 125
Tax Topics - Income Tax Regulations - Regulation 230 - Subsection 230(2) “cost” of call options closed out by writer is nil, not the cost of offsetting call option purchase/cost re short sale is the FMV of the borrowed shares 351

6 January 2020 External T.I. 2019-0800941E5 - In-kind contributions to a NPO

a deduction for services donated to an NPO could be offset by imputed barter income

A non-profit organization (the “NPO”) has been soliciting in-kind contributions of goods and services from local suppliers (the “Suppliers”), who believed that they will benefit from word of mouth advertising and promotion that would result in increased revenues. However, contributions by some Suppliers may be derived from activities that appear to be personal endeavors or hobbies. In commenting on the deductibility of such contributions, CRA stated:

[T]he arrangement may be one of bartering where the Suppliers are providing goods or services to the NPO in exchange for advertising and promotional services. For example, if a self-employed landscaper barters landscaping services to a local non-profit organization in exchange for advertising and promotion for their business, the landscaper would be required to include in income the value of the services provided to the non-profit organization. The landscaper would then claim a deduction for advertising and promotion used in the business for the same amount as the total value of the services given up. Additionally, the landscaper could also generally deduct costs of materials, etc., incurred in providing the landscaping services.

8 August 2019 Internal T.I. 2018-0776661I7 - Bitcoin Mining

bitcoin mining income generally recognized on basis of value of Bitcoins received

Respecting the treatment of a taxpayer who is in the business of Bitcoin “mining,” the Directorate stated:

Generally, when a miner successfully creates a valid block, they will receive two types of payments. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.

... Bitcoin received by a miner to validate transactions is consideration for services rendered by the miner. Where a taxpayer is in the business of Bitcoin mining, the Bitcoin received must be included in the taxpayer’s income at the time it is earned under section 3 and section 9 of the Income Tax Act.

... [W]here a taxpayer who is in the business of Bitcoin mining receives Bitcoin as a result of their mining activities, they must bring into income the value of the services rendered or the value of the Bitcoin received, whichever is more readily valued. In most cases, we expect the value of the Bitcoin received to be more readily valued and, accordingly, this is the amount to be brought into income.

7 February 2018 External T.I. 2016-0673331E5 - Stock Options - CCPCs

stock options received by independent contractor valued at more than their intrinsic value

A consulting company (“Serviceco”) received stock options (the “Options”) on the shares of the parent (“Parentco”) of its arm’s length client (“Opco”). Serviceco had agreed with its employee (“Employee”) to pay Employee a fixed salary plus a percentage of the Options. Accordingly, Serviceco transfers 6,000 Options to the Employee in Year 1, who exercises them in Year 2 just prior to Parentco making an initial public offering of its shares, and then disposes of the Parentco shares in Year 3.

After noting that the s. 7 rules did not apply, CRA stated:

[T]he Employee received the 6,000 Options in Year 1 as compensation for services rendered to Serviceco as an employee. Accordingly, the FMV of the Options, determined at time the Employee received the Options, will be included in the Employee’s income for Year 1 under subsection 5(1) and paragraph 6(1)(a). … It is the CRA’s view that the intrinsic value of an option is not reflective of its FMV; rather, a valuation method that is appropriate in the circumstances should be used to determine the FMV.

The tax consequences that result from the Employee’s exercise of the Options in Year 2 and the disposition of the optioned shares in Year 3 will depend on the facts. For information, refer to Interpretation Bulletin IT-479R, Transactions in Securities.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Options FMV of a stock option is higher than its in-the-money value 91

9 May 2016 Internal T.I. 2016-0638461I7 - Vehicle provided to subcontractor

the value of a free automobile to be included in s. 9 income should reflect what the recipient would normally charge for its services

A corporation provides an automobile to the shareholder of corporation that carries on a “personal services business” (“PSB”). The corporation is related to another corporation that is a client of the PSB. The corporation issues a T4A to the PSB for the fair market value of the automobile benefit provided. How should this amount be reported by the PSB, and are there any implications to the PSB’s shareholder? CRA responded:

The arrangement … appears to be one of bartering whereby the PSB provides services to its client in exchange for the use of an automobile and possibly other consideration paid by the client. In this case, the value of the services provided by the PSB must be brought into its income under subsection 9(1) where they are of the kind generally provided by the PSB in the course of earning income from its business. In arm’s length transactions, where an amount must be brought into income, that amount is the price which the PSB would normally have charged a stranger for its services. …

If the individual shareholder of the PSB is using the automobile for his/her own personal-use, a benefit under one of subsection 6(1), 15(1), 56(2) or 246(1) of the Act may need to be included in the individual shareholder’s income.

25 September 2015 External T.I. 2015-0596921E5 - Conversion from inventory to capital

no s. 9 income when house converted to personal use is sold

Do the rules in s. 45(1) apply where a home builder, who initially held a property as inventory, commenced to use it for his personal use, having regard to "2013-0493811C6, which discussed the CRA's views on C.A.E. Inc. v. The Queen, 2013 FCA 92"? CRA responded:

[In] 9335765… the CRA indicated that the rules in subsection 45(1) would not apply where real estate held by an individual as inventory is permanently converted to a capital property that is personal use property ("PUP")… [and] that the treatment of any gain on the ultimate sale of the particular PUP would not give rise to a gain or loss on income account. …

[This] continues to represent the CRA's views.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) no 45(1) on conversion of house inventory to personal use 130

23 December 2013 Internal T.I. 2013-0514701I7 - Bitcoins

sale for Bitcoins

When asked to address the consequences of buying and selling goods in exchange for Bitcoins, CRA noted that a sale of property or services for Bitcoins is a barter transaction, and stated:

Where an amount must be brought into income, that amount is the price that the taxpayer would normally have charged an arm's-length person for the goods or services. …


…Ms. B buys a book from the bookstore using Bitcoins. The value of the book is $20. Mr. A [the vendor] would treat the transaction as if he had been paid $20 in Canadian dollars for the book.

5 November 2013 CRA Press Release "What you should know about digital currency"

Where digital currency is used to pay for goods or services, the rules for barter transactions apply. …For example, paying for movies with digital currency is a barter transaction. The value of the movies purchased using digital currency must be included in the seller's income for tax purposes. The amount to be included would be the value of the movies in Canadian dollars. [See] IT-490, Barter Transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Commodities, and commodities futures and derivatives capital/income treatment of Bitcoin sales informed by securities trading principles 62

1 November 2013 External T.I. 2013-0501131E5 - Micro-FIT Rental Income

The taxpayer, who co-owned a house equally with his or her spouse, contracted with a solar equipment provider to have solar panels installed on their roof, so that the taxpayer would own the panels after 20 years. In the meantime, the equipment provider enters a microFIT contract with the Ontario Power Authority and receives revenue from selling the electricity from the panels. The equipment provider passes on a portion of this revenue to the taxpayer. Would each spouse include 1/2 of such revenue in income?.

CRA stated that "you and your spouse would each ... calculate your share of the rental income." Because the equipment provider retains ownership of the panels, the homeowners are not entitled to CCA deductions until they gain ownership.

5 April 2013 External T.I. 2012-0471151E5 F - Binding Agreement

side letter would not reduce owner’s entitlement to rents from property if not entered into at same time as property acquisition

Opco, which acquires an immovable, shortly thereafter agrees with an unrelated individual to pay 40% of the annual net rental income to the individual. Will the 40% amounts be excluded from its income or qualify for deduction therefrom? CRA stated:

[T]he C.C.Q. allows parties to modify the provisions of an apparent contract by means of a contract commonly referred to as a counter letter. …

Between the parties, a counter letter prevails over an apparent contract. …

Generally, the CRA agrees to recognize a counter-letter for tax purposes to the extent that:

  • the counter letter is concluded before or at the same time as the apparent contract and does not constitute an ex post facto arrangement;
  • the counter-letter is not a sham;
  • the counter-letter is disclosed to the CRA and the relevant documents are sent to the CRA at the appropriate time (usually when filing the relevant tax returns);
  • the facts relating to the particular situation corroborate the parties' legal relationships to the counter-letter.

In view of the foregoing and since it appears that the Agreement did not occur before or at the same time as the apparent contract, we are of the opinion that the Agreement cannot be characterized as a counter-letter within the meaning of the CCQ. Consequently, the sharing of annual net rental revenues between Opco and the Individual, as provided for in the Agreement, could not be binding on the CRA, which would rely, a priori, on the provisions of the apparent contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense counter letter payments non-deductible because Quebec counter letter entered into after apparent letter 239

22 October 2012 External T.I. 2012-0455921E5 - Free Rent in Lieu of Receiving Interest Income

receipt of a free rental accommodation in exchange for an interest free loan is a barter transaction
see also Donovan

The vendor of two residences takes back a second mortgage on the property from the purchaser, does not charge interest on the second mortgage and stays in the residences without being charged rent. CRA stated:

the receipt of a free rental accommodation in exchange for an interest free loan is a barter transaction....Thus, the value of the rent foregone granted by a Landlord in exchange for an interest-free loan from a Tenant is generally subject to taxation in the hands of the Landlord....

28 March 2012 External T.I. 2011-0430411E5 - Conversion of capital property to inventory

intended conversion of apartment buildings to condos

When a taxpayer holding an apartment building as capital property decides to convert it to condominiums and sell them, the property is converted to an income property when the decision is made to follow that course of action, with the result that when the condominiums are sold, capital gains or losses (based on the fair market value at the time of conversion) and income account gains or losses (based on subsequent changes in value) will be realized. This is supported by Hughes.

22 February 2012 External T.I. 2008-0289021E5 - Fair Value Accounting - Liabilities

financial liabilities not to be marked to market

the correspondent noted that under the GAAP that prevailed in 2008 (contained in Section 3855 of the CICA Handbook) taxpayers whose financial liabilities were incurred for trading purposes were required to revalue those liabilities at fair value, and referred in particular to situations where such liabilities were revalued at a year end as a result of a change in prevailing interest rates.

CRA indicated that the income or loss arising for accounting purposes from such annual adjustments due to fluctuations in interest rates would not be recognized for purposes of the Act. Although CRA accepted the Canadian General Electric case, that "decision does not apply to the revaluation of a debt due to interest, credit or other adjustments." Furthermore, s. 18(1)(e) "specifically denies a deduction for reserves and contingent liabilities."

27 October 2011 Internal T.I. 2010-0382161I7 F - CPN-144 - remises et ristournes

purchase price rebates earned after purchase are income rather than inventory cost reduction

In light of their treatment under International Accounting Standard (IAS) 2, "Inventories," and Emerging Issues Committee (EIC) Abstract EIC-144, "Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor," may volume rebates received or receivable by food wholesalers from suppliers be applied to reduce the cost of the purchased food inventory, or must they be included in income? CRA responded (TaxInterpretations translation):

Discounts generally are received by the taxpayer at the moment of purchase as a reduction in the price payable by the taxpayer and do not represent income to it.

In contrast, rebates paid or payable after the purchase constitute revenue to the taxpayer. Thus, a rebate which is not provided at the moment of purchase, and which depends on a future event, must be taken into account in computing income under subsection 9(1).

If discounts or rebates are considered to be amounts received by a taxpayer in order to earn business or property income, we are of the view that paragraph 12(1)(x) could apply ... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) change in methodology for determining cost does not require CRA approval 65

8 October 2004 APFF Roundtable Q. 36, 2004-0087041C6 F - Option d'achat d'actions conférée à un consultant

Discussion of the consequences of granting and exercise of a stock option to and by a consultant.

16 April 2003 Internal T.I. 2002-0160807 - Foreign exchange - Hedged receivables

Where foreign currency denominated accounts receivable are hedged by foreign currency forward contracts, the foreign currency denominated accounts receivable should be translated into Canadian currency at the prevailing year end exchange rate but so too should the forward currency contract. Since this produces the same result as the taxpayer's method of translating the accounts receivable at the forward rate, that method is acceptable.

After referring to the Friedberg case, CCRA stated that:

"While the CCRA recognizes the realization method of computing income in respect of a financial instrument for a trader in commodity futures, it does not mean that the Supreme Court of Canada precluded the use of the 'mark-to-market' method (or the margin account balance method) in computing income for income tax purposes."

15 July 2002 Internal T.I. 2002-0151247 - Stock Options Issued to Non-Employees

As there would be no market for an incentive option issued to a consultant by a Canadian corporation, and the exercise price at the time of grant was equal to the fair market value of the shares at that time, there would be no benefit to the consultant at the time of grant.

19 September 2001 External T.I. 2001-0092085 - Transfer of Obligation under Short Position

The assumption of a short sale obligation of an individual by a corporation controlled by him would result in realization of the accrued gain or loss on the short sale obligation.

11 September 2001 External T.I. 2001-0087365 - SHORT SALES

A transfer of securities by a lender to a borrower under a short sell arrangement to which s. 260 does not apply generally results in a disposition of the securities by the lender at fair market value in an acquisition by the borrower at fair market value on the date the securities are transferred to the borrower. The consideration paid by the borrower is in the form of a right provided to the lender to reacquire an equal number of identical securities for no consideration other than the extinguishment of the right. The disposition of the borrowed securities by the borrower to a third party immediately after they are borrowed would generally produce no gain or loss as the value of the borrowed securities will not have changed in the interim. When the right to acquire securities given by the borrower to the lender is settled, the borrower will purchase from a third party the number of securities it originally borrowed and dispose of these new securities to the lender in consideration for the settlement of that right; accordingly, the borrower will realize a gain or loss at that time equal to the change in the value of the borrowed securities during the term of the arrangement.

7 March 2001 External T.I. 2001-0068965 - CAPITAL PROPERTY V. INVENTORY

stratifying an apartment building

"It is unlikely that the mere act of stratifying an apartment building will result in such a conversion [from capital property to inventory]."

2 March 2001 External T.I. 2001-0066515 - Interest-Free Loan - Bartering

Tenants of a seniors residence building owned and operated by a charitable organization and who receive a reduction in their rent if they make an interest-free loan to the organization would be considered to derive investment income from the loan equal to the amount of the rent reduction.

20 July 2000 Internal T.I. 2000-0035017 - Conversion Capital Property to Inventory

When trucks of a leasing company reach the termination of the respective leases at the three-year point, there is a conversion of capital property to inventory, and capital cost allowance may not be claimed. "While a truck rental company would not be seen as having converted capital property to inventory when the leased trucks are being replaced only when worn out or obsolete ... where leased vehicles are withdrawn from leasing part prior to that time and are sold as an integral part of the taxpayer's normal business operations, a conversion of the trucks to inventory is considered to occur prior to their sale."

3 May 2000 External T.I. 1999-0013915 - STOCK OPTIONS TO INDEPENDENT CONTRACTORS

Where options are granted to an independent contractor as a result of the supplier/customer relationship, it will be required to include in computing its income from business in the year the fair market value of the options at the time the options were granted (i.e., the greater of the trading value and the in-the-money value). If the options are exercised by virtue of the supplier/customer relationship, the independent contractor will be required to include in computing its income from business in the year of exercise the difference between the fair market value of the shares at the time the shares were acquired, and the aggregate of the amounts paid for the shares and the amounts included in income at the time the options were granted. If the options expire, it may deduct the amount previously included in income.

11 April 2000 Internal T.I. 2000-0001327 - INDEX LINKED GIC CONTINGENT LIABILITY

The CCRA will accept the use of either the mark-to-market method or the realization method by mutual funds in accounting for derivatives provided that the mutual funds used the same method consistently from year to year.

16 November 1999 External T.I. 9902145 - STOCK OPTIONS

Where corporation B pays in part for services rendered by corporation A by way of the issuance of stock options, the fair market value of the options will be included in corporation A's income from business, and on any exercise the difference between (a) the value of the shares received and (b) the exercise price paid and the amount previously included in income, will also be added to corporation A's income. The adjusted cost base of the shares of corporation B to corporation A will be computed in accordance with s. 52(1).

14 August 1996 External T.I. 9614785 - BARTER TRANSACTION

With respect to an agreement entered into between a trader holding a substantial block of shares of a company in inventory, and a promoter who will receive a portion of the trader's shares at specified intervals if the shares reached a target trading price, RC stated that the proceeds of disposition of the shares to the trader would be the price that the trader would normally have sold as property to a stranger at the time of the transfer.

24 April 1995 External T.I. 9427715 - SECURITIES LENDING

Where a borrower of shares returns the shares to a lender with which it does not deal at arm's length, it will dispose of the shares for proceeds equal to the fair market value of the shares on the date of the transfer, resulting in a gain or loss equal to the change in the market value of the shares during the period of the securities loan. Similarly, the obligation to return the shares to the lender that arose at the time of the original borrowing will be extinguished for an equal amount, giving rise to a gain or loss on the settlement of the obligation equal the difference between value of the shares on the date of the loan and the repayment date.

18 May 1994 External T.I. 9329915 - WHETHER 53 APPLIES TO INVENTORY

In response to a query as to whether the rules in s. 53 applied in computing the income or loss on the disposition of a limited partnership interest which might not be capital property, the Directorate first noted that, although the definition of adjusted cost base may apply to any property, it was its view that the concept of adjusted cost base was not relevant in the calculation of taxable income of a taxpayer where s. 9 applied and that, conversely, Subdivision c was applicable only in respect of capital properties. After referring to the "truer picture" test enunciated in West Kootenay Power and Light Co. Ltd. v. The Queen 92 DTC 6023 (FCA), the Directorate then stated: accordance with these principles, any income or loss incurred by the partnership, to the extent of the taxpayer's share, should respectively be added or subtracted in the computation of the cost of his interest, for the purposes of section 9....[T]his would represent...the "truer picture' of the taxpayer's income for a taxation year..

30 March 1994 External T.I. 9337225 - SHARES HELD AS INVENTORY

On the redemption of shares held as inventory, a deemed dividend will arise pursuant to s. 84(3) and, to the extent that the paid-up capital of the share exceeds its cost to the shareholder, the excess will be included as business income of the recipient under s. 9(1). Because s. 54(h)(x) is not applicable, any deemed dividend arising under s. 84(3) cannot result in the realization by the recipient of any loss.

4 March 1994 Internal T.I. 9321217 - SALE OF BURIAL PLOTS

The sale of burial plots by cemetery operators is characterized by RC as similar to the granting of an easement, with the result that there is a partial disposition of the ownership rights associated with the operator's land. The inventory cost for these purposes might be determined by reference to the diminution in value of the land as a result of the sale of the burial plot.

21 February 1994 External T.I. 9335765 - CONVERSION FROM INVENTORY TO CAPITAL

Where a taxpayer permanently converts real estate from inventory to personal-use capital property, the ultimate sale of the real estate will not give rise to a gain or loss on income account.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) no s. 45 application to conversion of inventory to personal use 50

1994 A.P.F.F. Round Table, Q. 47, 5M08340

When a taxpayer acquires shares of a corporation in financial difficulty, as a speculation, for an amount ($100,000) that is less than the $500,000 paid-up capital of the shares and later, after the situation improves, withdraws $300,000 as a reduction of paid-up capital, the full $300,000 withdrawn by the taxpayer will be taxable as a business profit without any reduction being allowed for the amount paid for the shares. The Directorate added that "redemption of a portion of the shares by the corporation would have been preferable, as this would allow the taxpayer to claim a part of the cost of the shares in computing his buisness income for the year."

1 February 1993 T.I. (Tax Window, No. 28, p. 11, ¶2386)

Where the cost of developing a golf course situate in the middle of a residential development exceeds its estimated fair market value, the developer will not be able to add such excess to the cost of the surrounding residential lots even though the purpose of developing the golf course was to increase the value of those lots.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) 59

24 December 1992 Memorandum (Tax Window, No. 27, p. 14, ¶2337)

Unrealized gains and losses on gold loans of a gold producer that are designated by it as an effective hedge of its gold production should be included in income to the extent of the portion that corresponds to the producer's production for the particular year. The balance of the unrealized gains and losses on hedged amounts should be deferred.

25 September 1992 T.I. (Tax Window, No. 23, p. 11, ¶2171)

Changes in the shareholders of a corporation (including an acquisition of control) will not by themselves justify a change in the accounting policies followed by the corporation.

The temporal method is acceptable for accounting for foreign exchange, but not the current rate method.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 29

8 January 1992 T.I. (Tax Window, No. 27, p. 19, ¶2359)

Where a corporation transfers land as capital property on a rollover basis to a subsidiary which acquires the land to develop for resale, the entire difference between the subsidiary's proceeds of sale and its adjusted cost base (inherited from its parent) will be treated as business income.

92 C.M.T.C - Q.5

RC's position that a mining company must mark a gold loan to market applies even where the company only entered into one gold loan.

30 November 1991 Round Table (4M0462), Q. 13.1 - Conversion of Capital Property into Inventory Property (C.T.O. September 1994)

Where real property that is used for the purpose of gaining or producing income from a business or property is converted from capital property into inventory, the cost to the taxpayer for purposes of s. 10(1) is the fair market value of the property on the date of conversion. The notional capital gain or loss arising on the conversion will give rise to a taxable capital gain or allowable capital loss for the taxation year during which an actual sale of the real property occurs, irrespective of the manner in which the fair market value of the property fluctuates after the conversion date.

4 September 1991 T.I. (Tax Window, No. 9, p. 20, ¶1445)

Where there is a partial repayment of a debt acquired on income account at a discount, the taxpayer may use either the part disposition method or the cost recovery method. Under the cost recovery method, no amount is taken into income until the cost of the debt has been recovered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 53

90 C.P.T.J. - Q.11

Discussion of the consequences of a principal business corporation borrowing a million barrels of crude oil to be repaid through production from a particular project.

22 May 1990 T.I. (October 1990 Access Letter, ¶1451)

Discussion of computation of income from a joint venture.

IT-490 "Barter Transactions"

Meaning of barter

3. A barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. In a barter transaction between persons who are dealing with each other at arm's length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefor.

Recognition of barters for ITA purposes

4. The Department takes the view that barter transactions are within the purview of the Income Tax Act. Such transactions can therefore result in income or expense as contemplated by sections 3 and 9 thereof ... .

Words and Phrases

IT-102R2 "Conversion of property, other than real property, from or to inventory" 22 July 1985

8. Where capital property is converted to inventory, the action of conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). It is, however, recognized that the ultimate disposition of a property that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, with respect to capital property that has been converted to inventory, taxpayers may calculate capital gains or losses, if any, on the basis that a notional disposition of such property occurred on the date of conversion.

IT-218R "Profit, Capital Gains and Losses from the Sale of Real Estate, including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" 16 September 1986

10....where real estate is converted from capital property to inventory...for real estate that is used for the purpose of gaining or producing income from a business or property, its conversion to inventory will not constitute a change in use...and the proceeds from its ultimate sale will be treated in accordance with 15 below....

12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of

(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and

(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.

13. The units in a multi-unit residential apartment, or an office, warehouse storage building or any similar structure that is held as capital property by the owner will be considered to have been converted to inventory at the time when application is made to the relevant authority for approval to change the title to any such building to strata title, provided that the owner proceeds with the sale of the units.


Sabrina Wong, Sania Ilahi, "Tax Implications of Asset Securitizations", 2015 CTF Annual Conference Report

Typical structure of a trade receivables securitization (pp. 12:21)

[In] [t]he typical structure of a trade receivable securitization…the seller agrees to sell and the SPE agrees to purchase, on a continuing basis and over an agreed term, the trade receivables of the seller. … The purchase price for the receivables is typically the face amount of the receivables less a discount. The SPE issues commercial paper to fund the purchase price of the receivables. In most trade receivables securitizations, the seller holds back a portion of the purchase price, which is known as "the deferred purchase price." The deferred purchase price is payable to the seller only after the SPE recovers all amounts payable on the purchased receivables.

Sale v. secured loan in securitization (p. 12:21)

The courts [In re George Inglefield Limited, [1933] Ch. 1 (CA)] have also indicated that a difference between a sale and a secured loan is that in a sale the seller is not entitled to recover the subject matter of the sale by returning the purchase price to the purchaser. In a typical RPA in a trade receivables securitization, the seller is not entitled to a return on the purchased receivables on repayment of the purchase price. Another distinction between a sale and a secured loan is that if the SPE is unable to collect the full amount of a purchased receivable following termination of the RPA, the SPE has no right to collect any balance owing from the seller. …

Computation of profit on sale of trade receivables to securitization trust (p. 12:22)

Generally, it is the CRA's view [see 9206645] that the sale of accounts receivable, other than as part of the selling of a business, is on income account since the sale occurs in the ordinary course of the seller's business. …

Generally, the CRA takes the position [2007-022514lR3] that when the purchase price in a securitization consists of upfront cash payments plus amounts received as a deferred purchase price, the fair market value of the deferred purchase price is included in the seller's income on the date of the sale of the receivables. The amount of the deferred purchase price is considered to be a separate property, and any further recovery or loss is recognized when amounts are received from the SPE.

Dent, "Going for the Gold", CA Magazine, January 1990, p. 23

Includes a discussion of the tax treatment of forward gold sales.

Harris, "Tax Aspects of Condominium Conversions and Lease Inducement Payments to Recipients", 1986 Conference Report, c.45.

Tetreault, "Canadian Tax Aspects of Asset Securitization", 1992 Conference Report, c.23

Discussion of whether the transfer of purchased receivables from the seller to a special purpose vehicle under a trade receivables securitization constitutes a sale or a secured loan transaction.

Hudec, Jenkins, "Recent Financial Innnovation in the Canadian Energy Sector", 1991 Canadian Petroleum Tax Journal, Spring 1991, p. 85

Discussion whether a receivables securitization program gives rise to a "sale".

Fryers, "'Net Serve! One to Come!' (The Net Profits Interest in the Oil and Gas Industry - An In-Depth Analysis)", 1988 Canadian Petroleum Tax Journal, Spring 1988, p. 121

Discussion of the extent to which royalties or other payments computed by reference to profit are deductible.